Superphysics Superphysics
Chapter 3b

The Importance of Savings and Prudence

by Adam Smith Icon
6 minutes  • 1132 words

13 The proportion between industry and idleness is regulated by the proportion between capital and revenue.

  • Wherever capital predominates, industry prevails.
  • Wherever revenue, idleness.

Therefore:

  • every increase of capital naturally increases the real amount of industry
  • every reduction of capital naturally reduces it

Capital affects the number of productive hands. The number of productive hands affects the real wealth and revenue of all its inhabitants.

14 Capitals are increased by parsimony and decreased by prodigality and misconduct.

15 Whatever a person saves from his revenue, he adds to his capital. He employs his capital=

  • by using it himself to maintain more productive hands, and
  • by lending it at an interest to someone else to maintain productive hands.

The interest is his share in the borrower’s profits. A society’s capital is the same as the total individual capitals which compose it. It can only be increased by savings from its annual revenue.

16 Parsimony, and not industry, is the immediate cause of the increase of capital.

Industry provides what parsimony accumulates. But whatever industry might acquire can never increase if parsimony did not save and store it up.

17 Parsimony increases the fund destined for maintaining productive hands.

It tends to increase:

  • the number of those hands, and
  • the real national wealth generated by them.

It mobilizes more industry, which gives more value to the annual produce.

18 Annual savings are regularly consumed nearly in the same time too.

But it is consumed by a different set of people. In most cases, the part spent by a rich man from his revenue is consumed by idle guests and menial servants. They leave nothing in return for their consumption.

The part which he saves is immediately employed as a capital for the sake of profit. It is consumed by labourers, manufacturers, and craftsmen. They reproduce the value of their consumption with a profit. Had he spent his whole revenue in food, clothing, and lodging, it would have been distributed among unproductive workers. By saving some of his revenue into his capital, the food, clothing, and lodging that it could have bought would be reserved for productive workers. The consumption is the same, but the consumers are different.

19 A frugal man’s annual savings maintains more productive hands for the current or the ensuing year.

Like the founder of a public workhouse, he establishes a perpetual fund to maintain workers in the future. The perpetual allotment of this fund is not always guarded by any positive law or by any trust-right or deed of mortmain [perpetual ownership]​. It is always guarded by a very powerful principle= The obvious interest of every individual to whom the fund belongs. His annual savings is afterwards used to maintain productive hands. If used otherwise, it would create a loss.

20 The prodigal perverts it in this way.

He encroaches on his capital by not confining his expence within his income.

He pays the wages of idleness with the funds his forefathers had frugally consecrated to maintain industry. He is like a person who perverts the revenues of some pious foundation into profane purposes.

By reducing the funds for productive labour, he reduces the amount of that labour which is supposed to increase the country’s real wealth and revenue. If the prodigality of some was not compensated by the frugality of others, the country would soon be impoverished.

21 Even if the prodigal’s expences are all in local commodities instead of foreign commodities, its effect on the productivity of society would still be the same.

Every year, the society’s resources would maintain unproductive hands. The annual national produce would still decline.

22 This kind of expence would not cause any exportation of gold and silver.

The same amount of money would remain in the country. But if the food and clothing consumed by unproductive hands were distributed among productive hands, they would have reproduced their full value with a profit. The total value of goods in the country would have been increased.

23 The same amount of money cannot long remain in any country where the value of the annual produce declines.

The sole use of money is to circulate consumable goods. The amount of money which can be annually employed in any country must be determined by the value of the consumable goods annually circulated within it.

These must consist in:

  • the immediate produce of the land and labour of the country itself, or
  • the commodities bought with that produce.

In this case, the value of money must fall together with:

  • the declining value of that produce, and
  • the declining amount of money used to circulate that declining produce.

But the money thrown out of domestic circulation will not be allowed to lie idle. The interest of whoever possesses it requires that it should be employed. Having no employment at home, it will be sent abroad in spite of all laws and prohibitions. It will be employed to buy goods for the home country. Its exportation this way will continue for some time.

It will add to the country’s consumption beyond the value of its own produce. What was saved from that annual produce during prosperity will be used to buy gold and silver. This gold and silver will support its consumption in adversity. In this case, the exportation of gold and silver is the effect of its decline. It might even alleviate the misery of that decline for some little time.

24 On the contrary, the amount of money must naturally increase as the value of the annual produce increases.

The increasing value of the consumable goods circulated within society will need more money to circulate them. A part of the increased produce will naturally be used to buy more gold and silver needed to circulate the rest. In this case, the increase of those metals will be the effect, not the cause, of public prosperity. The country which can pay for those metals will never be short of the metals that it needs. On the other hand, no country will ever keep the metals that it does not need.

25 Every prodigal is a public enemy of a country’s real wealth and revenue.

Every frugal man is a public benefactor.

26 The effects of misconduct are often the same as those of prodigality.

Every injudicious and unsuccessful project in agriculture, mines, fisheries, trade, or manufactures, reduces the funds for maintaining productive labour. In every such project, the injudicious employments do not reproduce the full value of their consumption. There must always be some reduction in the productive funds of society.

27 It can seldom happen that a great nation can be much affected by the prodigality or misconduct of individuals.

The imprudence of some are always more than compensated by the frugality and good conduct of others.

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